Why Has UPS Introduced A Surcharge This Holiday Season?

For logistics companies like UPS (NYSE:UPS), the winter holiday season is one of the most gruelling times of the year. This period represents a make or break situation for most shipping giants, as failing to make deliveries on time tend to tarnish their reputations significantly, while hurting investor sentiment even more. Therefore, it is absolutely essentially that UPS is on top of its game in the upcoming months.

The company expects to deliver a mammoth 750 million holiday season deliveries, a 7 percent increase from 2016. Additionally, the Atlanta-based carrier expects it will deliver more than 30 million packages daily between Thanksgiving and Christmas.

In general, the heavy rise in shipments, in and around the holiday season, is primarily attributable to the rise in e-commerce globally. According to the National Retail Federation, e-commerce is expected to grow by around 8-12% this year, which is more than double the overall increase for all of retail. This is a staggering growth rate that is expected to grow at a similar rate over the next few years, at least.

To cater for this rise in shipments, UPS has come up with a few strategies. To begin with, the company has decided to hire about 95,000 temporary workers to drive delivery trucks and sort, load, and deliver packages. Additionally, the company is using technology to better the efficacy of these temporary workers. For instance, UPS is using real time GPS technology to help drivers effectively find the quickest routes, thereby enabling quicker door-to-door delivery times. Furthermore, the company has introduced a holiday surcharge that is expected to last between November 19 and December 3, and between December 17 and December 23.

The main reason for introducing such a surcharge is to help curtail the amount of package delivery orders it receives by forcing customers to choose other, “cheaper” carriers during this crucial time period. Such a strategy is expected to help reduce the burden on their end, consequently increasing overall productivity.

According to UPS, this technique has worked out well this time around. As mentioned previously, the company expects to deliver 30 million packages a day between Thanksgiving and Christmas. While this number is still great, it is comparatively less than the number of daily packages the company delivered in the same period last year.

That said, the company has received heavy criticism for the implementation of this surcharge. According to many, such a surcharge is unnecessarily hurting smaller merchants and customers at the expense of larger e-commerce players. But UPS feels differently. It maintains that it is best to make all the guaranteed deliveries on time, as opposed to promise a larger volume of deliveries and fall significantly short later.

The company is expected to make about $200 million in revenues thanks to the surcharge, which it expects to increase in the next holiday season. The next earnings call will give us a better perspective on how this strategy worked out.

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